A beneficiary experiencing financial pressure may ask the trustee for a loan instead of requesting an outright distribution. A loan may appear to preserve the beneficiary's future inheritance while providing immediate funds. However, a trustee should not treat the request as an informal family accommodation.

The first question is whether the trust permits or contemplates loans. Some trusts expressly authorize loans to beneficiaries, while others provide only discretionary distribution authority. The trustee should review the trust's language, distribution standard, spendthrift provisions, tax provisions, and any restrictions applicable to the requesting beneficiary.

The trustee should also evaluate whether the transaction benefits the trust. Relevant terms may include the interest rate, repayment schedule, maturity date, collateral, priority, and consequences of default. An undocumented or interest-free advance may later be characterized as a distribution, gift, breach of trust, or improper preference.

Fairness among beneficiaries is another concern. A loan to one beneficiary can reduce the cash available for investments, expenses, and distributions to others. The trustee may need to consider whether similar requests would be handled consistently and whether the borrower's eventual share should be adjusted if the loan remains unpaid.

The beneficiary's ability to repay should be examined objectively. Income, existing debt, collateral, credit history, and the purpose of the loan may all be relevant. A trustee may reasonably conclude that a requested loan is too risky, inconsistent with the trust's purpose, or likely to become an unrecoverable distribution.

When a California trust beneficiary loan is approved, the transaction should ordinarily be documented with appropriate loan instruments. Depending on the amount and circumstances, this may include a promissory note, security agreement, deed of trust, repayment schedule, and written trustee decision. Professional advice may be needed regarding interest, taxes, reporting, and enforcement.

Key takeaways:

• The trustee should confirm that the trust authorizes the proposed loan or provides sufficient discretionary authority.
• Loan terms should be documented and evaluated as an investment of trust property.
• The trustee must consider risk, fairness, liquidity, and the interests of all beneficiaries.

This article provides general information, not legal advice. Loans involving a trustee, trustee affiliate, or closely related beneficiary may raise additional conflict-of-interest concerns.

Helpful educational resources:

• https://leginfo.legislature.ca.gov/faces/codes.xhtml
• https://www.irs.gov/businesses/small-businesses-self-employed/applicable-federal-rates
• https://www.consumerfinance.gov/ask-cfpb/

Call Westlake Law Group at (818) 444-2022. Our attorneys assist trustees and beneficiaries with loan requests, discretionary distribution decisions, promissory notes, conflicts, accounting treatment, and court petitions. 30699 Russell Ranch Road, North Building, Suite 210, Westlake Village, California. Virtual consultations are available throughout Southern California.